Size Matters in 3G Wireless

A triumvirate of vendors – Ericsson AB (Nasdaq: ERIC), Alcatel-Lucent, and Nokia-Siemens – looks set to control almost 70 percent of the $56 billion global wireless infrastructure market, finds the latest report from Unstrung Insider.

The report, Vendor M&A Frenzy: What Happens Next, analyzes the impact of consolidation in the cellular network equipment sector and assesses likely growth segments in a market with modest overall revenue prospects.

The economic logic for consolidation has long been compelling. With too many vendors, fierce price-based competition, and the risk that this market could degenerate into a low-margin fistfight, a round of M&A was inevitable. Recent downward pressure on operating margins has accelerated the process.

Achieving greater scale is the key objective. Scale directly influences a vendor's ability to invest in research and development, optimize the supply chain and manufacturing processes, achieve greater geographic diversity, and ultimately to produce a profit.

Long-time market leader Ericsson shows why scale, when expertly managed, wins out. The Swedish vendor has been able to maintain higher profit margins than its smaller competitors while retaining, and even gaining, market share. As the only truly global vendor, it is well positioned for each regional uptick in spending. It also enjoys the local presence to begin creating what could become the world's leading professional services organization to fixed and mobile telecom operators.

The combination of Nokia Corp. (NYSE: NOK) and Siemens AG (NYSE: SI; Frankfurt: SIE) is a wireless powerhouse in the making, and looks capable of challenging Ericsson for top spot in mobile network equipment. The one glaring gap in the company's portfolio is the U.S. market, which is set to boom following the recent spectrum allocations.

Alcatel-Lucent is dominant in CDMA2000 via Lucent Technologies Inc. (NYSE: LU)'s portfolio and established in GSM through Alcatel (NYSE: ALA; Paris: CGEP:PA)'s business, but it lacks a clear-cut strategy for UMTS. While the addition of Nortel Networks Ltd. 's UMTS division will enhance its combined product portfolio, the short-term challenge of integrating 3G equipment from four different companies looks formidable.

The current M&A wave could also be interpreted as evidence that the world got too big for the Euro- and U.S.–centric vendors that grew up as national or regional champions. They now must stave off hungry, Asia-based newcomers such as Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) in far-flung corners of the globe.

From this perspective, today's consolidation represents the old guard closing ranks and rallying around tried-and-trusted markets and technologies. But what if these new mega-vendors have yoked themselves to a falling star by concentrating on the cellular technologies of today?

Aggressive challengers that failed to gain a foothold in 3G, such as Motorola Inc. (NYSE: MOT), Nortel, and Samsung Electronics Co. Ltd. (Korea: SEC) are already looking to pre-position themselves for the next generation of all-IP broadband wireless systems.

The report, Vendor M&A Frenzy: What Happens Next, is available as part of an annual subscription (12 monthly issues) to Unstrung Insider, priced at $1,595. Individual reports are available for $900. To subscribe, please visit:www.unstrung.com/insider.

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